Mutual funds have been a popular long-term investment vehicle for many years. As the name suggests, each fund pools the money of many investors to buy financial products to meet the goals of the investors.
These funds may invest in stocks, bonds, real estate trusts, or any number of other securities. They may be conservative or aggressive in nature and may aim for growth, income, preservation of capital, or other clearly stated goals. These funds can be an ease and affordable purchase with a technique known as dollar cost averaging, which allows regular investments of small amounts throughout the year.
For example, if you wish to put $3000 per year into a mutual fund you can pay as you go by adding $250 per month throughout the year. Some of these purchases will be at a higher price and some at a lower price. In the end, under typical market conditions, this technique will often take advantage of normal market fluctuations and lead to higher overall returns. This eliminates guesswork and the temptation to time the market.
Unlike stocks and short-term investments, mutual funds are primarily designed for the long term, usually a number of years. Investors should put their "long-term" money here. Unlike stocks, mutual fund prices do not fluctuate up or down during the trading day. They are not intended for short-term profit taking. Put and call options, which bet on short-term price fluctuations, are not permitted for these funds. When a purchase is made, the transaction is settled at the end of the business day when a price determined at the end of that day's trading.
To buy a mutual fund, federal regulations require that the investor first read a prospectus, a formal document spelling out the objectives, costs, and risks of investing in the fund. Since mutual funds are typically held for years, the exact date and purchase price is not critical. It is more important to plan for an expected return several years down the road. Mutual fund annual return performance is commonly given for periods of one year, 5 years, and 10 years. While these past returns do not guarantee future results they give an insight into how the fund manager will direct the fund and the investor's returns going forward. Dollar cost averaging is, therefore, ideal for purchasing these funds, since purchase dates can be conveniently scheduled in advance and you can plan ahead to make sure the purchase amounts are available.
